CGT or letting my house to parents?

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    CGT or letting my house to parents?

    i'm not sure if this is the correct forum, but here goes.

    I own my house (valued at £250k) which is mortgage free. I'm getting married in April this year and would like to buy somewhere bigger to live.
    my parents live in rented accomodation. they are 59 and 60. they have never owned their own home, and are unlikely ever to do so. They expressed an interest in buying my house from me if i were to help them with the mortgage, which i'll gladly do. however, i'm not sure if, in their position (my dad works and earns about 15k a year, my mum is recently retired), they will be eligable for a mortgage on the house.
    they have about £100k in savings and investments, and so i thought if they would give me that as a deposit, and then get a mortgage for £150k, then they could pay the mortgage (interest only) and both my and my brother would also help out, while also being the guarantors. Does anyone know if this is possible?

    Failing that, a backup plan would be to just let my parents move in and pay me a nominal rent - say £400. However, in doing this i'd have to declare this as income on my self assessment forms and pay tax on it, which i dont want to do!
    Would i be allowed to remortgage the house for say £100k, and then 'let' it out to my parents. that way, I'll get £100k which i can use as a deposit for the new house, and the rent moneys that i receive from my parents will be offset against the interest payments on the mortgage. if i did this approach:
    1) will i have to pay ctg on the house (assuming it went up in value) when i sell in the future
    2) am i allowed to only charge my parents £400 rent, when the market value of my property is about £1000? would the govt think i'm trying to avoid tax by charging lower rent? isn't there a social responsibility here whereby i'm taking my parents out of council accom and putting them into rented accom?

    hopefully i haven't gone on too much, but i'm struggling to find a way to let my parents live at my house without the future burden of paying tax on my kindness. any comments or help fully welcome!

    #2
    Some thoughts follow; I think you need to get some paid for advice, there are many issues. You need to make sure that their wills are in order too.

    What about selling it to them for their £100,000 cash and a non-interest-bearing loan - secured on the house and repayable on death of the second of your parents. (You will have to pay SDLT, sadly.) That way they get 'their' house, and you get the deposit for your new house.

    1. If you own the house and they live in it, then if they ever need to sell it/move then you will be probably paying CGT. And you will certainly pay it when the last one dies/goes into a home. This way that tax is avoided.

    2. This means that you won't end up paying IHT when you inherit something you gave them - if you sell it to them at undervalue (i.e. for 100k) you are increasing the value of their estate. With the current 600k limit for a married couple you'll be pretty safe, but rules can change.

    3. You need advice on how their ownership of a house may affect benefits payable/contribution if they have to go into a home. On the other hand, they won't have any savings any longer which would presumably be a bonus.

    4. They won't find it easy to get a mortgage. They're too old. If you and your brother lose your jobs, they lose their house; not good.

    5. If you do want money back from them (£400 per month), instead of paying you rent, or interest, they could repay you the capital on the non-interest-bearing loan. As this is not income it would be tax free. It would take over 30 years for them to pay you back. In their wills they can adjust the proportion of their assets given to you and your brother to make up for the rent/interest you have never received.
    The contents of this note are neither advice nor a definitive answer. If you plan to rely on this, you should pay somebody for proper advice.

    Comment


      #3
      grange - thanks for taking the time to read (and reply!) to my post. there is more info I could have added, but didn't want it to detract from the main elements of the post.
      I think you are right, i do need profressional paid advice, but thought i'd be better placed if i got the advice having done some background research, and you've certainly given me other areas to investigate - didn't know i could take capital on the non-interest bearing loan as payment, and thus avoid paying the tax on it! great shout!

      i'm pretty sure that should i loose my job, then they wont loose their house. i've been earning approx £100k pa for the past 8+ years and have done quite well. have lived a modest life and got lots of investments (mainly property), so should either my brother or myself loose out jobs, my parents home shouldn't suffer.

      they've supported me all my life, encouringing me to go to uni, giving me financial support during it and after, so i feel that helping them buy a home is the least i can do. i just want to find the most efficient way of doing so, so that neither of us are burdened with any tax issues during the life of this property

      Comment


        #4
        What about this scheme?
        A. Assess for what term (and at what ground rent) you could grant a lease such that the premium plus Net Annual Value of ground rent together do not exceed £125 000. The term could be much reduced from normal and the ground rent could be high.
        B. Grant that lease to your parents. No SDLT to pay!
        C. They then have security of ownership for their joint lifetime (and the lifetime of the survivor of them).
        D. Lease would include clause entitling you (or your successor) to terminate lease following death of that survivor, so as to reinstate your [current] unencumbered freehold estate.
        E. TAX EXPERTS: Would that cause any CGT/IHT problems?
        JEFFREY SHAW, solicitor [and Topic Expert], Nether Edge Law*
        1. Public advice is believed accurate, but I accept no legal responsibility except to direct-paying private clients.
        2. Telephone advice: see http://www.landlordzone.co.uk/forums/showthread.php?t=34638.
        3. For paid advice about conveyancing/leaseholds/L&T, contact me* and become a private client.
        4. *- Contact info: click on my name (blue-highlight link).

        Comment


          #5
          A neat way to avoid SDLT. But it is only 1% of 250k, so probably not much more than the lawyer's cost of drawing up the lease...

          Any ground rent would of course be taxable in OP's hands and would rapidly pass the 2.5k SDLT charge.

          I'm also concerned about what would happen if parents wanted to move house. If this were to be achieved otherwise than by OP buying them out, then CGT would be payable on sale of OP's reversionary interest. And I'd be quite happy not to be the one doing either the valuations or the CGT computations!

          Also OP would eventually suffer CGT on the reversion - whereas death would provide a CGT-free uplift (provided of course OP is the one who inherits it!).

          The other property portfolio of course makes a difference. I've never managed to satisfy myself on the tax whys and wherefores of letting a property to a connected party for an undervalue. Because if OP holds onto his property he could borrow the full 250k against it (albeit that he would be providing his marital home as security) but whether he can get tax relief on that full amount I don't know. OP if you do find out, can you please post here?


          I definitely like the idea of the CGT-free uplift in value by parents owning the property outright. I also like the idea of giving them complete security and flexibility of outright ownership. The interest-free loan should be repayable only on death so that (in the unfortunate event of OP's financial disaster) OP's creditors could never recover it whilst parents live.
          The contents of this note are neither advice nor a definitive answer. If you plan to rely on this, you should pay somebody for proper advice.

          Comment


            #6
            grange/jeffrey - thanks again for your comments.

            i'm going to be speaking to the parents in the next few days to determine if they serioulsy want to move, etc cos i dont want to be paying huge legal/tax advice bills if they are not serious with the idea.

            my initial reaction was to 'sell' the house to my parents, thus they are on the title deeds, and thus death would provide the free CGT uplift.
            but i dont want to burden them with an interest only mortgage for the rest of their lives, even though i'd help pay for it.

            once i've decided what i will do i will defo report back my findings. could be a few weeks though.....

            Comment


              #7
              heres a thought.
              what if i just gift the house to my parents. They'll pay the SDLT and any legal fees for the transfer of the deeds into their name. they then pay me a nominal rent less than or equal to what they are paying now.

              All that remains would be for me to put the house house into a trust, so that on death, I am the sole beneficary of the house, thus avoiding any potential IHT.

              this option does not involve any mortgage application, no declaration of income (as they can just pay me in cash) and no CGT liability. is that right?

              Comment


                #8
                Originally posted by ncooper1974 View Post
                no declaration of income (as they can just pay me in cash)
                Is cash not now classed as income?

                Comment


                  #9
                  I think that you are confused. There's no SDLT; they can't pay you rent on a property you don't own; you can't put a house you don't own into trust; you really don't want to be using trusts anyway (cost money to set up and run), trust me; you lose out on CGT uplift on death.


                  Unless your parents win the lottery, based on current rules, chances of paying IHT are so slim they're not worth worrying about. If it were me, I'd stick to my first idea and pay the SDLT.
                  The contents of this note are neither advice nor a definitive answer. If you plan to rely on this, you should pay somebody for proper advice.

                  Comment


                    #10
                    parents got no chance of winning the lottery - they dont even buy a ticket!

                    i agree with you though grange. think i'll gift the property to my parents. pay the SDLT, and ask that they make me the beneficary in their will......

                    and you too are correct colin - cash *is* classed as income. I'll just make sure that the money my parents give me doesn't go over the permittable allowance allowed each year without incurring tax

                    Comment


                      #11
                      Originally posted by ncooper1974 View Post
                      Think i'll gift the property to my parents. pay the SDLT, and ask that they make me the beneficary in their will......
                      Again: there is NO SDLT on a gift (but form SDLT60 is required, to self-certify transaction).
                      JEFFREY SHAW, solicitor [and Topic Expert], Nether Edge Law*
                      1. Public advice is believed accurate, but I accept no legal responsibility except to direct-paying private clients.
                      2. Telephone advice: see http://www.landlordzone.co.uk/forums/showthread.php?t=34638.
                      3. For paid advice about conveyancing/leaseholds/L&T, contact me* and become a private client.
                      4. *- Contact info: click on my name (blue-highlight link).

                      Comment


                        #12
                        Originally posted by ncooper1974 View Post
                        and you too are correct colin - cash *is* classed as income. I'll just make sure that the money my parents give me doesn't go over the permittable allowance allowed each year without incurring tax

                        Eh? The permittable allowance is £0.00. You are talking here about income - and you tell us you have substantial other income thus all income from your parents would be taxable.


                        I think you are now a little confused. See my first post and ignore the intervening posts.
                        The contents of this note are neither advice nor a definitive answer. If you plan to rely on this, you should pay somebody for proper advice.

                        Comment


                          #13
                          I think i'm writing some posts in this thread based on opinion (mine) rather than fact, and for that i do apologise. like i say, i do need to seek professional advice.

                          yes do i have substantial other income, and this is all properly taxed in the normal manner nuder my self assesment. I have no problem paying tax where its appropriate. what i dont want to do is pay tax on any money i receive from my parents simply because i am trying to help them out.

                          fact : i own a property worth £250k. mortgage free
                          fact : my parents live in rented accomodation and pay £400 pcm
                          fact : i would like to gift/donate/sell my property to my parents
                          fact : my parents cannot afford a mortgage to buy my property

                          so, i would like to let my parents live in my house. in return, they will give me £400 a month that they would normally be paying in rent in their rented accomodation. financially, they are no better (or worse) of than before. However, my parents will now be paying me £400 per month. I dont think that I should be paying tax on this. therefore, if i should, i would like to avoid it.
                          in the same way that i have gifted my parents a house, they will be gifting me £400 pcm.

                          admittedly, i thought that if i gifted my house to my parents, and when i say gifted i mean transfer the title from my name to their name, then i would have to pay SDLT - but from what you say jeffrey this is not true?
                          and my reason to gift the house to my parents is so that they can leave the house to me in their will, which means i have to CGT to pay on their death.
                          if the house was left in my name, then on their death, i would sell the house, and be liable for CGT (less any allowable expenses)

                          Comment


                            #14
                            If it looks like rent, then it is. So you pay tax on it.

                            and my reason to gift the house to my parents is so that they can leave the house to me in their will, which means i have to CGT to pay on their death.
                            No, no no. If they own the house, when they die there is no CGT and unless the house and other assets are worth over 600k there is no IHT either.

                            The reason there is no SDLT on a gift is because SDLT is charged at a percentage on actual consideration. For a gift, consideration is nil.

                            If you sell the house to your parents for 250k (or indeed whatever lesser sum you fancy), by way of non-interest bearing loan/combined with cash from their savings, and they repay the loan to you at £400 per month and leave you the property in their will then all your requirements are met (in exchange for a smallish SDLT charge).
                            The contents of this note are neither advice nor a definitive answer. If you plan to rely on this, you should pay somebody for proper advice.

                            Comment


                              #15
                              bugger me! not literally! i did mean to say...
                              "which means i have NO to CGT to pay on their death"

                              looks like i missed out an important word!

                              so really, the only difference is i either gift my parents the house, and they pay no SDLT. or i 'sell' them the house (which is effectively me giving it to them cos they can't raise a mortgage) and they pay SDLT.
                              i think i know which option i'm going to use.....

                              the only other question i have now is, is it still deemed a gift if my parents kindly give me £100k for a deposit on my new home?

                              and there is no chance that there is any future IHT or CGT to pay on death as apart from the house, they wont have any other assest that would be taken into consideration

                              thanks again for helping me out with this, and sorry for any confusions caused in ealier posts!

                              Comment

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